The tax classification of joint ventures (II)

In a past column we analyzed that, although the tax reform contained in Law 1819 of 2016 was right in outlining a single tax regulation for business collaboration contracts, due to the way -today- Article 18 of the Tax Statute was drafted, such regulation cannot -due to its own characteristics- be directly applied to the joint venture accounts contract, reason for which a hermeneutic effort must be made to fit it into such regulation.

This, we said, occurs because the law intends to treat all collaboration contracts (consortiums, temporary unions, joint ventures, joint accounts) as joint operations and not as joint businesses, which distorts the tax treatment that joint accounts must have, which, far from being a joint operation (under its treatment in IFRS), are a joint business.

The hermeneutic difficulty that the rule brings consists, specifically, in complying with the part that indicates that "the parties to the business collaboration contract must declare independently the assets, liabilities, income, costs and deductions that correspond to them, according to their participation in the assets, liabilities, income, costs and expenses incurred in the development of the business collaboration contract", when a special rule (article 507 of the Code of Commerce) establishes that the hidden participant is only called to declare the profits or losses generated by the joint business; never the income, costs or deductions of the manager, since these belong to him since the business was carried out "in his sole name and under his personal credit".

In Concept 001283 of August 15, 2016, the DIAN indicated that the certification of the tax and financial information of the joint venture accounts contract issued by the managing participant in favor of the hidden participant does not supplement the obligation of the latter to "independently declare the assets, liabilities, costs and deductions that correspond to it, according to its participation in the assets, liabilities, income, costs and expenses incurred in the development of the business collaboration contract" since such assertion "would imply disregarding the transparency regime incorporated as of law 1819 of 2016 on the matter".

Likewise, when asked about whether "the hidden participant must only record an income or deduction in proportion to its participation, according to the result of the joint venture contract has yielded a profit or loss", the entity indicated that it was the obligation of the hidden participant to report in its declaration "the assets, liabilities, income, costs and deductions that correspond to them, according to their participation in the assets, liabilities, income and expenses incurred in the development of the business collaboration contract".

In this sense, in order to be able to interpret and apply harmoniously both rules (article 507 of the Code of Commerce and article 18 of the Tax Statute) and thus be able to achieve the tax classification of the joint venture contract within the guidelines established in the taxation regime of the collaboration contracts, it must be understood that, if in the contract it was established that the hidden participant would only participate in the profits or losses of the joint business, then the hidden participant would have to declare such profit or loss, then the latter would have to declare such profit or loss in its income statement, and at the same time declare at zero its participation in the assets, liabilities, costs, income and deductions corresponding to it in the assets, liabilities, income and expenses incurred in the development of the joint venture contract, precisely because it does not have any participation in them.

If, on the contrary (and in accordance with the provisions of the Decision of the Council of State of April 1, 2004, where it was clarified that not only profits could be distributed within the framework of the joint account contract but also gross income without purification) the joint account contract indicates that the hidden participant will be entitled to a certain percentage of the income received by the manager in the development of the joint business, then he (the hidden one) will proceed to declare in his income tax return, his participation in such income according to the agreed percentage, declaring the rest of the items established in the corresponding rule as zero.

As it can be seen, the application of these rules is very difficult, so it is essential that the Government quickly issue a regulatory decree on the matter.